4

15 years ago my father gave about €15.000 to a family member in exchange for her share in an inheritance (not materialized to this day). Now this family member has changed her mind and she wants to give my father €20.000, which is €15.000 "adjusted for inflation". This amounts to 2% annual interest. I looked up the historical rates of inflation in my country and €20.000 is the correct amount. Needless to say, my father is not happy with this, since he could have used the money in a better way. The problem is that this agreement was verbal only and we do not have any documents to support any claim.

This has caused a great conflict in my family and I would like to find a way out of this by finding a retrospective interest rate that both sides would consider fair. The family member used the money to purchase an apartment where she lives until this day. The average interest level for mortgages in the last 15 years in my country is about 4%. However interest rate on 15 year government bonds issued 15 years ago is 5.3%. There simply is no "central" interest rate.

Another method of solving this would be to take the €20.000 and to ask the family member to lend my father another €20.000 for 15 years with a variable interest rate equal to the inflation rate. But this would not be completely fair to my father either, since any benefit, such as the 15 year essentially-interest-free loan that we are talking about, is more valuable in the past than it is today.

I would welcome any suggestions on how to find the fair value of €15.000 of 15 years ago, expressed either as a sum of money or a service.

  • 13
    If I was you I would encourage him to take the 20K. It is far better than zero, which is how most of these things end up. – Pete B. Oct 26 '17 at 19:22
  • 4
    15,000 to 20,000 in 15 years is about 1.94% yearly. 5% would be about 31,183. Using ECB historical interest rates for each time period and the lowest of the published rates, compounding yearly, I get about 23,600. – David Schwartz Oct 26 '17 at 20:58
  • @DavidSchwartz Thank you! I will try to propose that to both parties. – Martin Drozdik Oct 26 '17 at 21:11
  • 3
    @DStanley per my answer below, I disagree that this was a loan, but I do agree that any financial deals with family can be fraught with danger and should only be done with careful consideration. – NL - Apologize to Monica Oct 27 '17 at 17:24
  • 1
    Did your aunt also get a loan to purchase the apartment, or was the $15k enough to buy it outright? If she did get a loan, she can't object to at least paying the same interest rate to your father. – stannius Nov 1 '17 at 18:43
9

With no written agreement in place, the "right" rate is whatever both parties can agree to. I could argue that I could have invested the money in S&P 500 index funds and made about 9% annually over the last 15 years and the 15,000 would have been over 40,000.

The "fair" rate would be whatever rate of return could have been expected from whatever your father would have done with the money otherwise - keep it in a bank account, pay off debt, invest in the market, start a business, whatever. Your father has the benefit of hindsight to know what would have been a good use of the funds over 15 years.

Using the rate of inflation results in effectively a zero-percent loan in real interest terms (meaning no profit was made, just accounting for the time value of money).

Both parties need to either decide on an amount or equivalent rate, or decide if squeezing the other for a few thousand Euros is worth the strife.

  • 3
    Thank you for you answer! It is the answer that I was afraid of. The answer I was hoping for is something in the lines of "There is this cool method that you can use to get the exactly same deal as having been lent to this amount of money 15 years ago". Something like the third paragraph of my question. But I guess that is not even theoretically possible... – Martin Drozdik Oct 26 '17 at 21:28
  • Unfortunately, no. There's not a single "loan rate" that applies in all cases. Mortgages are different from unsecured personal loans which are different from corporate bonds. That's why these things need to be decided in writing up front. – D Stanley Oct 26 '17 at 21:29
  • 3
    @DStanley It is disingenuous to say a loan matching the inflation rate is equivalent to an investment yielding 0%. Your intent is clear, but in a world where savings accounts can offer 0.1% interest rates and central banks can offer negative interest rates, there is a big difference between an investment with a 0% yield and one with a 2% yield. – Eric Oct 27 '17 at 2:31
  • @Eric you're right - I did not explain my thinking correctly. I'll edit or remove it. – D Stanley Oct 27 '17 at 16:23
  • 1
    If there's nothing in writing, OP's father can't even enforce his due when the inheritance materializes. – stannius Nov 1 '17 at 18:42
19

What you are positioning as a loan was not a loan at all. Your father bought something to be delivered in the future. Your aunt does not want to deliver it, so she should buy it back at whatever the current market value is.

What is the price that your dad believes her share of the inheritance is currently worth? Is that based on actual appraisals and some sort of objective audit? If so, your aunt doesn't have much of a case. If not, then she could seek an audit to bolster her bargaining position.

How much did your aunt benefit from having a place to live for the last 15 years. Was that benefit greater than some larger amount of money at an unknown future date? That's probably why she sold her inheritance 15 years ago. Now that the inheritance looks like it is going to be available soon, she wants to trade back after having enjoyed the use of your father's money. That might be okay, but simply paying back the original sum with inflation, but without interest, doesn't seem fair to your father. She may not be able to afford to give any more than what she is offering, in which case, she might want to consider offering the original sum now and some portion of her inheritance as interest on that original sum.

I'm not taking sides in this one. If it were one of my siblings, I'd be inclined to give the benefit of the doubt and take a smaller amount back if I felt that the lesson was learned (and if I felt that he/she would make wise use of my gift to him/her).

I have no idea what your father's current economic situation is, nor am I aware of any other baggage that might influence his feelings about his sister. It's as likely as not that money isn't really what is bothering him, in which case, the amount she repays may have little to do with bridging the divide between them. You might need to ask different questions in the Interpersonal Skills stack if you want to help your father feel better.

  • 5
    +1 For viewing the transaction as a purchase, not a loan. – Nosrac Oct 27 '17 at 13:10
  • Looking at the current price isn't necessarily the fair thing. For one thing, there's the value of the asset over the 15 years. For instance, if it's a house, you should include the fair market rent for the house for 15 years. If it's a stock, you should include all the dividends over 15 years. Second, there's the question of how to account for risk. – Acccumulation Jun 13 at 2:51
  • @Acccumulation If I sold my car 15 years ago, and I wanted to buy it back, I would look at exactly one thing: the current value of the car. – NL - Apologize to Monica Jun 14 at 14:14
5

There's often a legal basis to answer this question. For instance, Austria (guessing from your profile) currently uses a 4% Statutory interest rate. You'll need to dig up not just the actual but also the historical rates.

Note that you'll want the non-commercial interest rate - some countries differentiate between loans to businesses and loans to individuals.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.